Radio Waves

Radio stocks have taken a serious beating this year. Clear Channel Communications, the pre-eminent radio “play,” is near the bottom of its 52-week price range, recently around $45 per share, less than half its peak price of $95 and change. (Despite the recent swoon, the stock is still one of the best performers over the past decade; the shares sold for less than $1—adjusted for stock splits that occurred since then—10 years ago.)

A number of things have taken the air, so to speak, out of these stocks. One is the prospect of a slowdown in radio ad growth, especially if the economy decelerates. Another is the evaporation of dot-com advertising. These two factors are somewhat related.

The abundance of investor funding and the urge to get a message out permitted the dot-com companies—generally neophytes to the world of media advertising—to pay premium prices for ad time, effectively driving up prices for longtime users of the medium.

An economic slowdown, plus the sobering of these drunken-sailor spen ders, would work to moderate or even lower ad prices.

But radio can benefit from trading down during periods of economic pressure as some advertisers divert money away from more expensive media. That happened in the last recession. Since then, the industry has become far more concentrated, with fewer larger companies now owning hundreds of stations. These large operating groups have significantly better market intelligence than station operators had last time around. Presumably, they will be in a stronger position to bargain with their advertising clients and hold the line on pricing.

Even if the industry does hit an economic rough patch, it won’t be a catastrophe; it has weathered these storms before, always emerging in good shape. That’s because the day-to-day or even year-to-year ups and downs of business have never threatened the medium’s salient attributes: ubiquity, mobility and cost-efficiency.

Now, though, the radio industry could be facing a fundamental shift.

A couple of satellite-delivered radio services are months away from debuting—and their impact on the conventional broadcasting business is far from clear. These new services will charge listeners a fee for providing high-quality, commercial-free programming that will be available in homes and in cars, the primary locus of radio listening. Some of the radio stocks’ decline may be in anticipation of this development.

Is it a real danger? Perhaps. But this new form of broadcasting prom ises to be commercial-free. So if it attracts a significant audience, it will reduce the ratings of commercial stations.

What happens when the total amount of available ratings in a medium decreases? As the big TV networks lost viewers to cable TV and computers, the price of the now- scarcer national ratings went up. Not only that, but a new medium can become an important advertiser as it tries to attract, in this case, listeners.